White Paper on Federal Crop Insurance Program Support for Natural Disasters – InsuranceNewsNet

WASHINGTON, 22nd of July (TNSrep) — The Congressional Research Service published the following In Focus white paper on Supporting the Federal Crop Insurance Program in the Event of Natural Disasters (#IF11924) at July 21, 2022by an agricultural policy analyst Stephanie Rosch.

Here are excerpts:

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Natural disasters – events such as severe droughts, floods and storms – can lead to agricultural and animal production losses as well as other physical and financial losses for farms. The Federal Crop Insurance Program (FCIP) provides farmers with the ability to purchase insurance against financial loss caused by certain adverse growing and market conditions. By insuring against adverse growing conditions, FCIP policies can also compensate farmers for financial losses caused by certain natural disasters. The extent to which the FCIP compensates farmers for losses related to natural disasters depends on the type of disaster, the type of FCIP policy purchased and the level of coverage chosen by the producer.

FCIP is permanently authorized under the Agricultural Adjustment Act of 1938 (PL 75-430, 52 Stat. 72) and the Federal Crop Insurance Act of 1980 (PL 96-365, 7 USC Sec.Sec.1501 and sq.), as amended. It has permanent and indefinite financing power. The FCIP does not require a federal disaster designation or declaration to trigger payouts. FCIP insurance policies are priced according to their actuarial ratings. The federal government subsidizes the premiums farmers pay for these insurance policies to encourage farmers’ participation in the program. For more information, see CRS report R46686, Federal Crop Insurance: An introduction.

In addition to the FCIP, the United States Department of Agriculture (USDA) offers a number of assistance programs designed to address agricultural losses following a natural disaster. For an overview of these programs, see CRS In Focus IF10565, Federal Disaster Assistance for Agriculture.

Insured risks

FCIP crop insurance policies insure against losses due to drought; Heat; hail; excess humidity, precipitation or rain; freeze; freeze; cold and wet weather; wind; tornado; cyclone; hurricane or tropical depression; certain fires; earthquake; insect and wildlife damage; plant disease; volcanic eruption; and certain other causes of loss. Policies also cover lack of irrigation water when caused by disasters or natural conditions. Some policies insure against losses caused by falling market prices.

Availability of cover

FCIP coverage is available for purchase in all WE counties. The FCIP insures most field crops, a wide variety of specialty crops and pasture. Cover must be taken out before a natural disaster.

For most crops insured under the FCIP, coverage is measured against average yields or incomes. Catastrophic Coverage (CAT) provides benefits when realized crop yields are between 0% and 50% of average crop yields or between 0% and 65% of average county yields. Higher levels of yield coverage and income coverage are available in 5% increments. For some policies, coverage may exceed 85%. To mitigate the tendency of farmers to take on additional risk after purchasing insurance (i.e. moral hazard), no policy provides 100% coverage of losses.

Additionally, certain annual crops may be eligible for FCIP benefits if adverse weather and other natural conditions prevent timely planting. For more details on these payments, see CRS R46874, Federal Crop Insurance Program (FCIP): Replanting, Delayed Planting, and Prevented Planting.

The federal government fully subsidizes the premiums for CAT coverage. Farmers pay an increasing share of premiums for higher levels of cover, up to a maximum of 62% of the total premium. In addition to their share of premium costs, farmers pay an administrative fee per crop and per county. Average federal spending for the FCIP $8.1 billion per year from FY2011 to FY2021.

Coverage purchased

From 2011 to 2021, the total acreage insured by the FCIP increased from 266 million to 444 million acres (Figure 1). The share of acres insured at higher coverage levels also increased over this period. These two trends have increased the overall support that the FCIP can provide in the event of a natural disaster when it occurs.

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Figure 1. FCIP Acres Insured by Level of Coverage

Source: CRS using data from USDA Risk Management Agency’s Summary of Business database, downloaded July 11, 2022.

Notes: Years are harvest years. Includes only crops insured under acreage policies. Catastrophic only includes yield coverage. Other levels of hedging include yield and revenue hedging.

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States with higher crop values ​​insured under the FCIP are likely to receive more program support in the event of a natural disaster. Midwestern states, as well as California and Texashad the largest harvest values ​​insured by the FCIP in 2021 (Figure 2).

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Figure 2. Values ​​of crops insured by the FCIP in 2021

Source: CRS using data from USDA Risk Management Agency’s Summary of Business database, downloaded July 11, 2022.

Note: Excludes price and margin coverage for dairy and livestock.

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FCIP Support for Natural Disasters

Between 2011 and 2021, droughts, floods, storms and other related conditions accounted for the majority of FCIP acres with losses (Figure 3) and claims paid (Figure 3). Benefits were paid for natural disaster events with Federal disaster designations and declarations, for other adverse weather and growth conditions, and for other causes of loss. Widespread drought in 2012 and 2013 contributed to the relatively high levels of acres affected by losses and total claims paid in those years. Spring flooding and overly wet conditions accounted for the majority of FCIP claims paid out in 2015 and 2019.

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Figure 3. FCIP Insured Acres with Losses

Source: CRS using data from USDA Risk Management Agency Cause of Loss Data Files, downloaded July 12, 2022.

Notes: Years are harvest years. “Drought, heat and related” includes losses due to drought, heat, failure of irrigation supply, excess sun and hot wind. “Freeze, cold and related” includes losses due to frost, freezing temperatures, cold winter and cold wet weather.

“Floods, excess humidity and related” includes losses due to excess humidity, excessive precipitation, excessive rain and flooding. “Hurricane, cyclone, tornado and wind” includes losses due to hurricane, tropical depression, wind, excessive wind, cyclone and tornado. “Down in price” includes losses due to declines in market prices. “County and margin policies” include losses due to declining yields and average county incomes. “All Others” includes losses due to hail, fire, insect damage, disease and other insurable perils.

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Figure 4. FCIP Claims Paid by Type of Loss

Source: CRS using data from USDA Risk Management Agency Cause of Loss Data Files, downloaded July 12, 2022.

Notes: Amounts are not adjusted for inflation. The years are harvest years. Compensation paid in 2019 excludes additional payments for prevented planted acres authorized under the Disaster Relief Supplementary Appropriations Act of 2019 (PL 116-20). See notes to Figure 3 for explanation of each loss category.

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problems for Congress

Between 2011 and 2017, Congress did not provide additional support for agricultural production losses. FCIP payouts have provided the bulk of disaster relief, including for widespread drought conditions in 2012-2013 and flooding in 2015. Since 2018, Congress earmarked ad hoc funds to compensate for certain losses related to natural disasters that occurred in 2017-2021, including $10 billion of the Public Funding Extension and Provision of Emergency Assistance Act (PL 117-43). USDA used the allocated funds to increase the support offered by the FCIP and to compensate producers who had not purchased coverage under the program. Farmers receiving these payments were required to purchase two years of coverage from the FCIP or through the Uninsured Agricultural Disaster Assistance Program. For an overview of this assistance, see CRS In Focus IF11539, Wildfires and Hurricanes Indemnity Program (WHIP). Congress may consider the impact on farmers’ purchases of FCIP coverage of continuing or expanding ad hoc assistance.

Farmers who plant insurable crops choose whether to purchase FCIP insurance and the level of coverage. The data indicates that farmers purchase less FCIP coverage in areas where premiums are more expensive, which tends to occur in areas where the risk of crop loss is relatively higher. CAT coverage is the cheapest FCIP policy farmers can purchase. The federal government pays 100% of the premium; farmers pay an administrative fee. Whether Congress plans to expand the role of the FCIP in the fight against natural disasters, one option could be to redesign the coverage of the CAT to better attract farmers to areas with higher risks of crop losses.

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The white paper is published on: https://crsreports.congress.gov/product/pdf/IF/IF11924

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